Question: You have computed the expected return on equity based on the security market line (SML). The systematic risk measure,, is part of that model. The

You have computed the expected return on equity based on the security market line (SML). The systematic risk measure,, is part of that model. The total risk premium earned by a stock is x RP_M, the latter being the "market risk premium." We have not been dealing with many securities with a negative measure. (Time to sharpen your philosophical edge!)

Why should an equity with a negative beta earn less return? (5 pts)
If the negative beta is large enough, the stock might have an expected return less than the risk-free rate. How does this make sense? (5 pts)
Who would buy a stock with a negative?

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